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Maxxcom Inc. - MRRS Decision
Headnote
Mutual Reliance Review System for ExemptiveRelief Applications -- going private transaction by way of planof arrangement -- transaction to be subject to a number of conditionsincluding majority of the minority approval -- management informationcircular will comply with all requirements except for formalvaluation -- non-cash consideration consists of securities forwhich there is a liquid market -- securities offered as non-cashconsideration are freely tradeable -- valuator's opinion thatformal valuation of the non-cash consideration not required-- applicant to state in information circular that it has noknowledge of any material non-public information that has notbeen generally disclosed -- applicant exempt from valuationrequirement with respect to non-cash consideration.
Ontario Rule Cited
Rule 61-501 - Insider Bids, Issuer Bids, GoingPrivate Transactions and Related Party Transactions, ss. 6.3and 9.1.
IN THE MATTER OF
THE SECURITIES LEGISLATIONOF
ONTARIO AND QUEBEC
AND
IN THE MATTER OF
THE MUTUAL RELIANCE REVIEWSYSTEM
FOR EXEMPTIVE RELIEF APPLICATIONS
AND
IN THE MATTER OF
MAXXCOM INC.
MRRS DECISION DOCUMENT
WHEREAS the local securities regulatoryauthority or regulator (the "Decision Maker") in eachof the provinces of Ontario and Québec (collectively,the "Jurisdictions") has received an application fromMaxxcom Inc. ("Maxxcom") for a decision under thesecurities legislation of the Jurisdictions (the "Legislation")that, in connection with a proposed going private transaction(the "Proposed Transaction") in respect of Maxxcom,to be carried out by way of plan of arrangement pursuant towhich Maxxcom's principal shareholder, MDC Corporation Inc.("MDC"), will acquire all of the issued and outstandingcommon shares of Maxxcom (the "Maxxcom Shares") heldby public shareholders of Maxxcom in exchange for Class A subordinatevoting shares of MDC ("MDC Class A Shares"), Maxxcombe exempt from the requirements of the Legislation:
(a) under subsection 6.3(1)(d) of OntarioSecurities Commission Rule 61-501 ("Rule 61-501")to obtain a formal valuation of the non-cash considerationbeing offered pursuant to the Proposed Transaction, providedMaxxcom complies with subsection 6.3(2) of Rule 61-501 otherthan clause (b)(i) thereof; and
(b) under subsection 6.3(1)(d) of QuébecSecurities Commission Policy Q-27 ("Policy Q-27")to obtain a formal valuation of the non-cash considerationbeing offered pursuant to the Proposed Transaction, providedMaxxcom complies with subsection 6.3(2) of Policy Q-27 otherthan the 10% limitation contained in clause (b) thereof;
AND WHEREAS pursuant to the Mutual RelianceReview System for Exemptive Relief Applications (the "System"),the Ontario Securities Commission is the principal regulatorfor this application;
AND WHEREAS Maxxcom has represented tothe Decision Makers that:
1. MDC is a corporation amalgamated underthe Business Corporations Act (Ontario) (the "OBCA").
2. MDC is a reporting issuer (or its equivalent)in each of the provinces of Canada and in the United Statesand is not on the list of defaulting issuers maintained byeither of the Decision Makers.
3. The authorized capital of MDC consistsof an unlimited number of MDC Class A Shares, an unlimitednumber of Class B multiple voting shares and an unlimitednumber of non-voting Preference Shares, issuable in series,in an unlimited number, of which 5,000 Series 1 PreferenceShares, 700,000 Series 2 Preference Shares and an unlimitednumber of Series 3 Preference Shares have been designated.Each outstanding Class B multiple voting share of MDC is convertibleinto one MDC Class A Share on a one-for-one basis. As at June5, 2003, there were 16,464,871 MDC Class A Shares, 450,470Class B multiple voting shares, no Series 1 Preference Shares,no Series 2 Preference Shares and no Series 3 Preference Sharesof MDC issued and outstanding.
4. The outstanding MDC Class A Shares arelisted and posted for trading on the Toronto Stock Exchange(the "TSX") in Canada under the symbol "MDZ.A"and are quoted for trading on the Nasdaq National Market inthe United States under the symbol "MDCA". The outstandingClass B multiple voting shares of MDC are not publicly listedor quoted.
5. During its most recently completed financialyear ended December 31, 2002 and during its current financialyear, MDC has made the following dispositions:
5.1 On January 10, 2002, MDC sold an additional4.54% interest in its Canadian cheque business operatedby Davis + Henderson, Limited Partnership ("D+H LP")for gross proceeds of approximately $17.2 million (followinga sale of a 45.45% interest in D+H LP through the conversionof same into Davis + Henderson Income Fund in December 2001for gross proceeds to MDC of approximately $250 million);
5.2 On April 2, 2002, MDC sold its remaining50.01% interest in D+H LP for gross proceeds of approximately$200 million; and
5.3 On May 29, 2003, MDC sold 80% of itsinterest in its U.S.-based direct-to-consumer cheque businessoperated by Custom Direct, Inc. ("CDI") and itsaffiliated companies through the conversion of same intoCustom Direct Income Fund ("CDIF") and the concurrentinitial public offering of trust units of Custom DirectIncome Fund. The outstanding trust units of CDIF are listedand posted for trading on the TSX under the symbol "CDI.UN".The sale resulted in gross proceeds to MDC of approximately$110 million. On June 13, 2003, pursuant to the exerciseof the underwriters' over-allotment option, MDC sold trustunits of CDIF for gross proceeds of $16.5 million. MDC currentlymaintains, directly and indirectly, a 20% interest in CDIand 2,963,804 trust units (or approximately 19%) of theoutstanding trust units of CDIF. MDC's direct and indirectinterest in CDI is effectively exchangeable in certain circumstancesfor an aggregate of 3,903,451 trust units of CDIF.
As a result of the transactions referred toin paragraph 5, the core assets of MDC currently essentiallyconsist of its 73.5% interest in Maxxcom and its remainingdirect and indirect interest in CDI and CDIF.
6. Maxxcom is a corporation incorporated underthe OBCA.
7. Maxxcom is a reporting issuer (or its equivalent)in each of the provinces of Canada and is not on the listof defaulting issuers maintained by either of the DecisionMakers.
8. The authorized capital of Maxxcom consistsof an unlimited number of Maxxcom Shares and an unlimitednumber of preference shares, issuable in series, of which,as at June 5, 2003, there were 49,098,962 Maxxcom Shares andno preference shares issued and outstanding.
9. The outstanding Maxxcom Shares are listedand posted for trading on the TSX under the symbol "MXX".
10. MDC owns 36,091,375 Maxxcom Shares, representing73.5% of the total outstanding Maxxcom Shares. Seventy-oneregistered holders hold 26.5% of the outstanding Maxxcom Shares.
11. Subject to review of the Proposed Transactionby the Independent Committee (as defined in paragraph 18 below),MDC has requested that Maxxcom call a special shareholders'meeting of the Maxxcom shareholders (the "Meeting")to approve, among other matters, the Proposed Transaction.If the Proposed Transaction receives approval by the requisiteshareholder votes at the Meeting (including approval by amajority of the votes cast by minority shareholders as requiredby Section 4.7 of Rule 61-501 and Section 4.5 of Policy Q-27),it is intended that the Proposed Transaction will be completedand all shareholders of Maxxcom (other than MDC) will exchangetheir Maxxcom Shares for MDC Class A Shares at the exchangeratio provided pursuant to the Proposed Transaction.
12. The completion of the Proposed Transactionwill be subject to a number of conditions including, withoutlimitation, receipt of all applicable regulatory and shareholderapprovals. The management information circular (the "InformationCircular") to be prepared for the Meeting will comply,subject to receipt of the relief requested hereby, with therequirements of applicable corporate and securities laws andwill provide that the holders of Maxxcom Shares may dissentin respect of the Proposed Transaction in accordance withthe provisions of the OBCA and be paid the fair value fortheir Maxxcom Shares (subject to the right of the partiesnot to proceed with the Proposed Transaction in the eventthat dissents in respect of more than a certain percentageof the outstanding Maxxcom Shares are filed). The InformationCircular will disclose, among other matters, that Maxxcomhas no knowledge of any material non-public information concerningMaxxcom or its securities that has not been generally disclosed.
13. As a result of the dispositions notedin paragraph 5 above, the Information Circular will contain(i) a pro forma balance sheet of MDC (for the mostrecent interim period) giving effect to the disposition ofCDI in accordance with OSC Rule 54-501 and Sections 6.2 and13.2 of National Instrument 44-101; and (ii) pro formaincome statements (both annual and for the most recent interimperiod) of MDC giving effect to the dispositions of D+H LPand CDI in accordance with OSC Rule 54-501 and Sections 6.2and 13.2 of National Instrument 44-101. The balance sheettogether with the income statements are collectively referredto herein as the "MDC Pro Forma Financial Statements".
14. For the Proposed Transaction to be approvedby shareholders in accordance with applicable corporate law,it must be approved by at least 66 2/3% of the votes castby holders of Maxxcom Shares, present or represented by proxyat the Meeting (including votes cast by MDC).
15. In addition, Section 4.7 of Rule 61-501and Section 4.5 of Policy Q-27 each require that the ProposedTransaction be approved by a majority of the votes cast byminority shareholders, present or represented by proxy atthe Meeting.
16. Upon completion of the Proposed Transaction,Maxxcom will become a wholly-owned subsidiary of MDC.
17. A committee of directors (the "IndependentCommittee") of Maxxcom independent of MDC has been establishedby Maxxcom for the purposes of supervising the preparationof a formal valuation of the Maxxcom Shares, reviewing theProposed Transaction and making a recommendation to the boardof directors of Maxxcom in respect of same.
18. The Independent Committee has retainedlegal counsel and an investment advisor (the "FinancialAdvisor"), each of which is independent of MDC.
19. The Financial Advisor retained by theIndependent Committee will prepare a formal valuation of theMaxxcom Shares under the supervision of the Independent Committee.The Financial Advisor has concluded that a formal valuationof the MDC Class A Shares is not necessary in order to assessthe fairness, from a financial point of view, of the considerationbeing offered to the holders of the Maxxcom Shares other thanMDC pursuant to the Proposed Transaction.
20. Under the Proposed Transaction, Maxxcomshareholders (other than MDC) will receive a number of MDCClass A Shares based on the "MDC Share Value", beingthe volume weighted average trading price of the outstandingMDC Class A Shares on the TSX for the 20 trading days endingon the trading day preceding the date of the special meetingof Maxxcom shareholders to be held to consider the ProposedTransaction, as follows:
20.1 if the MDC Share Value is above $10.18,Maxxcom shareholders will receive one MDC Class A subordinatevoting share for every 5.5 Maxxcom Shares they own;
20.2 if the MDC Share Value is at or above$9.25 up to and including $10.18, Maxxcom shareholders willreceive a number of MDC Class A Shares representing $1.85for every Maxxcom Share they own; and
20.3 if the MDC Share Value is below $9.25,Maxxcom shareholders will receive one MDC Class A Sharefor every 5.0 Maxxcom Shares they own.
At $1.85 per Maxxcom Share, based on the volumeweighted average of the trading price of the outstanding MaxxcomShares for the 20 days immediately prior to the announcementof the Proposed Transaction, the transaction represents apremium of 41%.
21. The MDC Class A Shares to be offered asconsideration under the Proposed Transaction will be freelytradeable following their issuance.
22. A "liquid market" for the outstandingMDC Class A Shares exists as defined in Rule 61-501 and PolicyQ-27, in that:
22.1 there is a published market for theoutstanding MDC Class A Shares as such shares are listedand posted for trading on the TSX and quoted on the NasdaqNational Market;
22.2 during the period of 12 month periodbefore the date the Proposed Transaction was publicly announced:
22.2.1 the number of outstanding MDC ClassA Shares was at all times at least 5,000,000 shares (infact, there were at least 16,400,000 MDC Class A Sharesoutstanding) excluding MDC Class A Shares beneficiallyowned, directly or indirectly, or over which control ordirection was exercised, by related parties and MDC ClassA Shares that were not freely tradeable;
22.2.2 the aggregate trading volume ofthe MDC Class A Shares on the TSX was at least 1,000,000MDC Class A Shares (in fact, the trading volume was atleast 12,500,000 MDC Class A Shares as at June 5, 2003);
22.2.3 there were at least 1,000 tradesin MDC Class A Shares on the TSX (in fact, there wereat least 7,674 trades for the period June 5, 2002 throughJune 4, 2003); and
22.2.4 the aggregate trading value basedon the price of the trades referred to in clause 23.2.4was at least $15,000,000 (in fact, the trading value wasat least $87,000,000); and
22.3 the market value of the outstandingMDC Class A Shares on the TSX, as determined in accordancewith Rule 61-501 and Policy Q-27, was at least $75,000,000for the calendar month of May, 2003 (in fact, the marketvalue was at least $99,800,000 for that month).
23. The MDC Class A Shares to be offered asconsideration under the Proposed Transaction will constitutea minimum of approximately 14.4% and a maximum of approximately15.8% of the aggregate number of MDC Class A Shares currentlyissued and outstanding, and a minimum of 14.0% and a maximumof 15.4% of the total number of MDC Class A Shares and ClassB multiple voting shares of MDC currently issued and outstanding,immediately before the distribution of the MDC Class A Sharesin connection with the Proposed Transaction.
24. The Proposed Transaction constitutes agoing private transaction under Rule 61-501 and Policy Q-27.Unless discretionary relief is granted, Maxxcom would be subjectto the requirement under subsection 6.3(1)(d) of each of Rule61-501 and Policy Q-27 to obtain a formal valuation in respectof the MDC Class A Shares (the non-cash consideration to beoffered under the Proposed Transaction).
25. Maxxcom cannot rely upon the exemptionfrom subsection 6.3(1)(d) of each of Rule 61-501 and PolicyQ-27 contained in subsection 6.3(2) of each of Rule 61-501and Policy Q-27 because the MDC Class A Shares to be issuedpursuant to the Proposed Transaction will constitute morethan 10% (the "10% Limit") of the aggregate numberof MDC Class A Shares issued and outstanding immediately beforethe distribution of the MDC Class A Shares pursuant to theProposed Transaction.
26. Although the number of MDC Class A Sharesbeing issued in connection with the Proposed Transaction exceedsthe 10% Limit:
26.1 holders of Maxxcom Shares will be receivingsecurities which are substantially more liquid than theirMaxxcom Shares;
26.2 following the recent completion ofthe transaction noted in clause 5.3 above, the core assetsof MDC essentially consist of (i) its 73.5% interest inMaxxcom, the value of which Maxxcom shareholders can assessbased on past disclosure and the summary of the formal valuationof Maxxcom Shares to be included in the Information Circular;and (ii) its remaining direct and indirect interest in CDIand CDIF, the value of which can be assessed by MaxxcomShareholders: (A) via the MDC Pro Forma FinancialStatements to be included in the Information Circular; and(B) as to the approximately 30% interest in CDIF retainedby MDC, through reference to the trading prices of the outstandingtrust units of same on the TSX; and
26.3 the Financial Advisor has concludedthat a formal valuation of the MDC Class A Shares is notnecessary in order to assess the fairness, from a financialpoint of view, of the consideration being offered to theminority holders of the Maxxcom Shares pursuant to the ProposedTransaction.
AND WHEREAS pursuant to the System, thisMRRS Decision Document evidences the decision of each DecisionMaker (collectively, the "Decision");
AND WHEREAS each of the Decision Makersis satisfied that the test contained in the Legislation thatprovides the Decision Maker with the jurisdiction to make theDecision has been met;
THE DECISION of the Decision Makers underthe Legislation is that, in connection with the Proposed Transaction,Maxxcom:
(a) is exempt from the requirement under subsection6.3(l)(d) of Rule 61-501 to obtain a formal valuation of thenon-cash consideration being offered pursuant to the ProposedTransaction, provided Maxxcom complies with subsection 6.3(2)of Rule 61-501 other than clause (b)(i) thereof; and
(b) is exempt from the requirement under subsection6.3(l)(d) of Policy Q-27 to obtain a formal valuation of thenon-cash consideration being offered pursuant to the ProposedTransaction, provided Maxxcom complies with subsection 6.3(2)of Policy Q-27 other than the 10% Limit contained in clause(b) thereof.
June 19, 2003.
"Ralph Shay"